UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C FORM 10-Q. For the quarterly period ended March 31, 2018 OR

Transcription

1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C FORM 10-Q þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2018 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number VALVOLINE INC. Kentucky (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 100 Valvoline Way Lexington, Kentucky Telephone Number (859) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes þ No o Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act. (Check one): Large Accelerated Filer þ Non-Accelerated Filer o (Do not check if a smaller reporting company) Accelerated Filer o Smaller Reporting Company o Emerging Growth Company o If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ At April 30, 2018, there were 195,682,961 shares of the Registrant s common stock outstanding.

2 VALVOLINE INC. AND CONSOLIDATED SUBSIDIARIES TABLE OF CONTENTS Page PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (Unaudited) Condensed Consolidated Statements of Comprehensive Income For the three and six months ended March 31, 2018 and Condensed Consolidated Balance Sheets As of March 31, 2018 and September 30, Condensed Consolidated Statements of Cash Flows For the six months ended March 31, 2018 and Notes to Condensed Consolidated Financial Statements 6 ITEM 2. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 30 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 47 ITEM 4. CONTROLS AND PROCEDURES 48 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 49 ITEM 1A. RISK FACTORS 49 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 49 ITEM 6. EXHIBITS 50 2

3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Valvoline Inc. and Consolidated Subsidiaries Condensed Consolidated Statements of Comprehensive Income Three months ended March 31 Six months ended March 31 (In millions, except per share data - unaudited) Sales $ 569 $ 514 $ 1,114 $ 1,003 Cost of sales Gross profit Selling, general and administrative expenses Legacy and separation-related expenses, net Equity and other income (12) (5) (21) (15) Operating income Net pension and other postretirement plan non-service income and remeasurement adjustments (10) (17) (20) (43) Net interest and other financing expenses Income before income taxes Income tax expense Net income $ 67 $ 71 $ 57 $ 143 NET INCOME PER SHARE Basic $ 0.33 $ 0.35 $ 0.28 $ 0.70 Diluted $ 0.33 $ 0.35 $ 0.28 $ 0.70 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic Diluted DIVIDENDS PAID PER COMMON SHARE $ 0.07 $ 0.05 $ 0.15 $ 0.10 COMPREHENSIVE INCOME Net income $ 67 $ 71 $ 57 $ 143 Other comprehensive income (loss), net of tax Unrealized translation gain (loss) (3) Amortization of pension and other postretirement plan prior service credit (2) (2) (4) (4) Other comprehensive gain (loss) 1 4 (7) Comprehensive income $ 68 $ 75 $ 57 $ 136 See Notes to Condensed Consolidated Financial Statements. 3

4 Valvoline Inc. and Consolidated Subsidiaries Condensed Consolidated Balance Sheets (In millions, except per share amounts - unaudited) Assets Current assets March September Cash and cash equivalents $ 127 $ 201 Accounts receivable, net Inventories, net Other current assets Total current assets Noncurrent assets Property, plant and equipment, net Goodwill and intangibles, net Equity method investments Deferred income taxes Other noncurrent assets Total noncurrent assets 1,074 1,125 Total assets $ 1,869 $ 1,915 Liabilities and Stockholders Deficit Current liabilities Short-term debt $ $ 75 Current portion of long-term debt Trade and other payables Accrued expenses and other liabilities Total current liabilities Noncurrent liabilities Long-term debt 1,183 1,034 Employee benefit obligations Other noncurrent liabilities Total noncurrent liabilities 1,680 1,554 Commitments and contingencies Stockholders deficit Preferred stock, no par value, 40 shares authorized; no shares issued and outstanding Common stock, par value $0.01 per share, 400 shares authorized; 197 and 203 shares issued and outstanding at March 31, 2018 and September 30, 2017, respectively 2 2 Paid-in capital 3 5 Retained deficit (274) (167) Accumulated other comprehensive income Total stockholders deficit (226) (117) Total liabilities and stockholders deficit $ 1,869 $ 1,915 See Notes to Condensed Consolidated Financial Statements. 4

5 Valvoline Inc. and Consolidated Subsidiaries Condensed Consolidated Statements of Cash Flows Six months ended March 31 (In millions - unaudited) Cash flows from operating activities Net income $ 57 $ 143 Adjustments to reconcile net income to cash flows from operating activities Depreciation and amortization Debt issuance cost and discount amortization 1 2 Deferred income taxes 65 Equity income from affiliates (9) (7) Distributions from equity affiliates 5 3 Pension contributions (9) (10) Gain on pension and other postretirement plan remeasurements (8) Gain on sale of assets (4) Foreign currency exchange loss 1 Stock-based compensation expense 7 3 Change in assets and liabilities (a) Accounts receivable (50) (42) Inventories (16) (17) Payables and accrued liabilities 2 (9) Other assets and liabilities 33 (6) Total cash provided by operating activities Cash flows from investing activities Additions to property, plant and equipment (30) (27) Acquisitions, net of cash acquired (67) (48) Proceeds from sale of operations 5 Other investing activities, net 1 (1) Total cash used in investing activities (91) (76) Cash flows from financing activities Net transfers to Ashland (2) Proceeds from borrowings, net of issuance costs Repayments on borrowings (15) (83) Repurchases of common stock (123) Purchase of additional ownership in subsidiary (15) Cash dividends paid (30) (20) Other financing activities (5) Total cash used in financing activities (93) (30) Effect of currency exchange rate changes on cash and cash equivalents 2 (1) Decrease in cash and cash equivalents (74) (37) Cash and cash equivalents - beginning of period Cash and cash equivalents - end of period $ 127 $ 135 (a) Excludes changes resulting from operations acquired or sold. See Notes to Condensed Consolidated Financial Statements. 5

6 Valvoline Inc. and Consolidated Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE 1 BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES The accompanying unaudited condensed consolidated financial statements have been prepared by Valvoline Inc. ( Valvoline or the Company ) in accordance with accounting principles generally accepted in the United States ( U.S. GAAP ) and Securities and Exchange Commission ( SEC ) regulations for interim financial reporting, which do not include all information and footnote disclosures normally included in annual financial statements. Therefore, these condensed consolidated financial statements should be read in conjunction with Valvoline s Annual Report on Form 10-K for the fiscal year ended September 30, The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make use of estimates and assumptions that affect the reported amounts and disclosures. Actual results may vary from these estimates. In the opinion of management, the assumptions underlying the condensed consolidated financial statements for these interim periods are reasonable, and all adjustments considered necessary for a fair presentation have been made and are of a normal recurring nature unless otherwise disclosed herein. The results for the interim periods are not necessarily indicative of results to be expected for the entire year. Certain prior period amounts have been reclassified to conform to the current presentation. Recent accounting pronouncements A description of new U.S. GAAP accounting standards issued and adopted during the current year is required in interim financial reporting. A detailed listing of recent accounting standards relevant to Valvoline is included in the Annual Report on Form 10-K for the fiscal year ended September 30, The following standards relevant to Valvoline were either issued or adopted in the current year, or are expected to have a meaningful impact on Valvoline in future periods. Recently adopted In the first fiscal quarter of 2018, Valvoline adopted the following: In July 2015, the Financial Accounting Standards Board ( FASB ) issued accounting guidance to simplify the subsequent measurement of certain inventories by replacing the current lower of cost or market test with a lower of cost or net realizable value test. The guidance applies only to inventories for which cost is determined by methods other than last-in, first out ( LIFO ) and retail inventory methods. Valvoline adopted this guidance prospectively on October 1, Valvoline utilizes LIFO to value approximately 70% of its gross inventory and there were no material differences in the Company s previous valuation methodology for its remaining inventory using lower of cost or market to lower of cost or net realizable value. In March 2017, the FASB issued accounting guidance that changed how employers who sponsor defined benefit pension and/or postretirement benefit plans present the net periodic benefit cost in the Condensed Consolidated Statements of Comprehensive Income. This guidance requires employers to present the service cost component of net periodic benefit cost in the same caption as other employee compensation costs for services rendered during the period. All other components of the net periodic benefit cost are presented separately outside of the operating income caption. Valvoline retrospectively adopted this guidance on October 1, Accordingly, Netpensionandotherpostretirementplannon-serviceincomeandremeasurementadjustments has been reclassified to non-operating income for all periods presented within the Condensed Consolidated Statements of Comprehensive Income, which reduced previously reported operating income by $17 million and $43 million for the three and six months ended March 31, 2017, respectively. 6

7 Issued but not yet adopted In May 2014, the FASB issued accounting guidance outlining a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, which supersedes most current revenue recognition guidance. This guidance introduces a five-step model for revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards under current guidance. The Company is evaluating the effect of adopting the new revenue guidance on its financial statements and does not currently expect it to have a material effect to net earnings. Based on an evaluation of current contracts and revenue streams to-date, Valvoline believes that most revenue transactions recorded under the new guidance will be substantially consistent with the treatment under existing guidance. The Company s revenue transactions generally consist of a single performance obligation to transfer promised goods and are not accounted for under industry-specific guidance. The Company anticipates expanded footnote disclosures under the new revenue guidance. Management will continue to complete its assessment of revenue streams and implementation plans, including monitoring developments, and plans to finalize conclusions by the fourth quarter of fiscal Valvoline expects to adopt this guidance using the modified retrospective method, which would recognize the cumulative effect of the changes in retained earnings at the date of adoption, but would not retrospectively apply the new guidance to prior periods. Valvoline will adopt this standard in the first quarter of fiscal 2019 and will provide updated disclosures of the anticipated impacts of adoption in future filings. In February 2016, the FASB issued new accounting guidance related to lease transactions. The primary objective of this guidance is to increase transparency and comparability among organizations by requiring lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by leases and to disclose key information about leasing arrangements. The Company expects to adopt the new guidance in the first quarter of fiscal 2020 using the modified retrospective method. While adoption is expected to lead to a material increase in the assets and liabilities recorded on the Condensed Consolidated Balance Sheet and an increase in footnote disclosures related to leases, the Company is in the process of developing assessment and implementation plans to identify and assess all forms of leases, analyze the practical expedients and determine the specific impacts on its condensed consolidated financial statements. 7

8 NOTE 2 - FAIR VALUE MEASUREMENTS The following table sets forth, by level within the fair value hierarchy, the Company s financial assets and liabilities that were accounted for at fair value on a recurring basis: March 31, 2018 September 30, 2017 Quoted prices in active markets for identical assets Quoted prices in active markets for identical assets (In millions) Fair Value Level 1 Fair Value Level 1 Assets Cash equivalents (a) $ 31 $ 31 $ 46 $ 46 Foreign currency derivatives (b) Non-qualified trust funds (c) Total assets at fair value $ 60 $ 60 $ 77 $ 77 Liabilities Foreign currency derivatives (d) $ 1 $ 1 $ 1 $ 1 Total liabilities at fair value $ 1 $ 1 $ 1 $ 1 (a) (b) (c) (d) Included in Cashandcashequivalentsin the Condensed Consolidated Balance Sheets. Included in Othercurrentassetsin the Condensed Consolidated Balance Sheets. As of March 31, 2018, $2 million of this balance is included in Othercurrentassets, with the remainder included in Othernoncurrentassetsin the Condensed Consolidated Balance Sheets. As of September 30, 2017, this balance is included in Othernoncurrentassetsin the Condensed Consolidated Balance Sheets. Included in Accruedexpensesandotherliabilitiesin the Condensed Consolidated Balance Sheets. There were no Level 2 or 3 financial assets or liabilities that were accounted for at fair value on a recurring basis as of March 31, 2018 or September 30, Additionally, during the three and six months ended March 31, 2018 and 2017, there were no transfers between levels of the fair value hierarchy. Cash equivalents A portion of the Company s excess cash is held in highly liquid investments with maturities of three months or less. Cash equivalents generate interest income and are measured at fair value using prevailing market rates. Derivatives The Company uses derivatives not designated as hedging instruments consisting primarily of forward contracts to hedge foreign currency denominated balance sheet exposures and exchange one foreign currency for another for a fixed rate at a future date of twelve months or less. During the three and six months ended March 31, 2018 and 2017, gains and losses recognized for changes in the fair value of these instruments were not material and were included in Selling,general andadministrativeexpensesin the Condensed Consolidated Statements of Comprehensive Income to offset the gain or loss on the hedged item in the same period as the remeasurement losses and gains of the related foreign currency-denominated exposures. The Company had outstanding contracts with highly-rated financial institutions with notional values of $ 33 million and $ 47 million as of March 31, 2018 and September 30, 2017, respectively. Non-qualified trust fund The Company maintains a non-qualified trust to fund benefit payments for certain of its U.S. non-qualified pension plans, which primarily consists of highly liquid fixed income U.S. government bonds. During the three and six months ended March 8

9 31, 2018 and 2017, gains and losses related to these investments were not material and were immediately recognized within Selling,generalandadministrative expensesin the Condensed Consolidated Statements of Comprehensive Income. Long-term debt The Company s outstanding fixed rate senior notes consist of 5.500% senior unsecured notes due 2024 with an aggregate principal amount of $375 million issued in July 2016 (the 2024 Notes ) and 4.375% senior unsecured notes due 2025 with an aggregate principal amount of $400 million issued in August 2017 (the 2025 Notes and together with the 2024 Notes, the Senior Notes ). The fair values of the Senior Notes shown in the table below are based on recent trading values, which are considered Level 2 inputs within the fair value hierarchy. Long-term debt is included in the Condensed Consolidated Balance Sheets at carrying value, rather than fair value, and is therefore excluded from the fair value table above. Carrying values shown in the following table are net of unamortized discounts and issuance costs. (In millions) Fair value Carrying value March 31, 2018 September 30, 2017 Unamortized discount and issuance costs Fair value Carrying value Unamortized discount and issuance costs 2024 Notes $ 385 $ 370 $ 5 $ 401 $ 370 $ Notes Total $ 774 $ 765 $ 10 $ 809 $ 764 $ 11 Refer to Note 7 for more information on the Senior Notes and Valvoline s other debt instruments that have variable interest rates, and accordingly, their carrying amounts approximate fair value. NOTE 3 - ACQUISITIONS AND DISPOSITIONS Quick Lubes store acquisitions During the six months ended March 31, 2018, the Company acquired 61 service center stores for a total of $67 million. These acquisitions included 59 previous franchise service center stores, of which 56 were acquired from Henley Bluewater LLC in northern Ohio and Michigan on October 2, 2017 for $60 million. During the six months ended March 31, 2017, acquisitions totaled $48 million and included 33 service center stores, of which five were previous franchises. The results of operations of the acquired stores, which were not material, have been included in the Company s condensed consolidated financial statements from the date of each acquisition, and accordingly, pro forma disclosure of financial information has not been presented. The Company s acquisitions are accounted for such that the assets acquired and liabilities assumed are recognized at their acquisition date fair values, with any excess of the consideration transferred over the estimated fair values of the identifiable net assets acquired recorded as goodwill. Goodwill is generally expected to be deductible for income tax purposes and is primarily attributed to the operational synergies and potential growth expected to result in economic benefits in the respective markets of the acquisitions. 9

10 A summary follows of the aggregate cash consideration paid and the total assets acquired and liabilities assumed for the six months ended March 31: (In millions) Inventory $ 1 $ Property, plant and equipment 2 Intangible assets Other noncurrent assets 3 Net assets acquired $ 67 $ 48 Included within the intangible assets above is approximately $40 million of goodwill and $24 million of reacquired franchise rights recognized during the six months ended March 31, Prior to the acquisition of franchise service center stores, Valvoline licensed the right to operate quick lube service centers, including use of the Company s trademarks and trade name. In connection with these acquisitions, Valvoline reacquired those rights and recognized separate definite-lived intangible assets, which are being amortized on a straight-line basis over the weighted average remaining term of approximately seven years. The effective settlement of these arrangements resulted in no settlement gain or loss as the contractual terms were at market. During the six months ended March 31, 2018, the purchase price allocation for the acquisition of certain franchise locations during the three months ended June 30, 2017 was adjusted to reduce non-amortizable goodwill and increase amortizable intangible assets by $6 million. The Company believes that these changes were not material and does not expect any additional changes to the preliminary purchase price allocations summarized above for acquisitions completed during the six months ended March 31, Remaining ownership interest in subsidiary Valvoline historically owned a 70% controlling interest and consolidated the financial results of its subsidiary in Thailand. In December 2017, Valvoline purchased the remaining 30% interest for total consideration of approximately $16 million, making it a wholly-owned subsidiary of the Company. This interest was not material to the current or prior period financial statements for presentation and disclosure as a noncontrolling interest, which was eliminated as a result of this purchase through a net charge to Paid-incapitaland Retaineddeficit. Dispositions During the second fiscal quarter of 2018, the Company sold two service center stores to a franchisee within the Quick Lubes reportable segment. Valvoline received proceeds of approximately $5 million and recognized a gain of $3 million on the sale of net assets that was recorded in Equityandotherincomein the Condensed Consolidated Statements of Comprehensive Income for the three and six months ended March 31,

11 NOTE 4 - ACCOUNTS RECEIVABLE The following summarizes Valvoline s accounts receivable: (In millions) March September Trade and other accounts receivable $ 441 $ 390 Less: Allowance for doubtful accounts (6) (5) $ 435 $ 385 Prior to May 2017 when Valvoline s former parent company, Ashland Global Holdings Inc. (which together with its predecessors and consolidated subsidiaries is referred to as Ashland ), distributed its net investment in Valvoline (the Distribution ), Ashland was party to an agreement to sell certain Valvoline customer accounts receivable in the form of drafts or bills of exchange to a financial institution. Each draft constituted an order to pay for obligations of the customer to Ashland arising from the sale of goods to the customer. The intention of the arrangement was to decrease the time accounts receivable was outstanding and increase cash flows as Ashland in turn remitted payment to Valvoline. During the six months ended March 31, 2017, $11 million of accounts receivable were sold to the financial institution under this agreement. Following the Distribution, Valvoline became party to the arrangement to sell certain customer accounts receivable in the form of drafts or bills of exchange to the financial institution. During the six months ended March 31, 2018, Valvoline sold $50 million of accounts receivable to the financial institution. NOTE 5 - INVENTORIES Certain lubricants are valued at the lower of cost or market using the last-in, first-out ( LIFO ) method. Remaining inventories are carried at the lower of cost or net realizable value using the weighted average cost method. The following summarizes Valvoline s inventories: (In millions) March September Finished products $ 198 $ 180 Raw materials, supplies and work in process LIFO reserves (33) (33) Obsolete inventory reserves (4) (3) $ 194 $

12 NOTE 6 - GOODWILL AND OTHER INTANGIBLES Goodwill The following table summarizes the changes in the carrying amount of goodwill by reportable segment and in total during the six months ended March 31, (In millions) Core North America Quick Lubes International Total September 30, 2017 $ 89 $ 201 $ 40 $ 330 Acquisitions (a) Dispositions (b) (1) (1) March 31, 2018 $ 89 $ 234 $ 40 $ 363 (a) Activity associated with the acquisitions of 56 service center stores from Henley Bluewater LLC and five other quick lubes service center stores, as well as adjustments related to prior year acquisitions. Refer to Note 3 for details regarding the acquisitions. (b) Activity associated with the derecognition of goodwill from the sale and disposition of two quick lubes service center stores. Refer to Note 3 for further details. Other Intangible Assets Valvoline s purchased intangible assets were specifically identified when acquired and have finite lives. Intangible assets were $39 million in gross carrying amount, net of $6 million in accumulated amortization as of March 31, 2018 and were reported in Goodwillandintangibles,neton the Condensed Consolidated Balance Sheet. Amortization expense recognized during the three and six months ended March 31, 2018 was $2 million. Amortization expense recognized on intangible assets during the prior year periods was not material. Estimated amortization expense for each of the next five fiscal years, assuming no additional amortizable intangible assets, is as follows for the years ended September 30: (In millions) 2018 $ $ $ $ $ 4 12

13 NOTE 7 - DEBT OBLIGATIONS The following table summarizes Valvoline s short-term borrowings and long-term debt: (In millions) March September Notes $ 400 $ Notes Term Loans Trade Receivables Facility Revolver Other (a) (10) (11) Total debt $ 1,206 $ 1,124 Short-term debt 75 Current portion of long-term debt Long-term debt $ 1,183 $ 1,034 (a) At March 31, 2018, Other includes $12 million of debt issuance cost discounts and $2 million of debt acquired through acquisitions. At September 30, 2017, Other included $13 million of debt issuance cost discounts and $2 million of debt acquired through acquisitions. Senior Notes During August 2017, Valvoline completed the issuance of 4.375% senior unsecured notes due 2025 with an aggregate principal amount of $400 million. The net proceeds from the offering of the 2025 Notes were $394 million (after deducting initial purchasers discounts and debt issuance costs), which were used to make a voluntary contribution to the Company s qualified U.S. pension plan. During July 2016, Valvoline completed the issuance of 5.500% senior unsecured notes due 2024 with an aggregate principal amount of $375 million. The net proceeds from the offering of the 2024 Notes was $370 million (after deducting initial purchasers discounts and debt issuance costs), which were transferred to Valvoline s former parent, Ashland. The Senior Notes are subject to customary events of default for similar debt securities, which if triggered may accelerate payment of principal, premium, if any, and accrued but unpaid interest on the notes. Such events of default include non-payment of principal and interest, non-performance of covenants and obligations, default on other material debt, and bankruptcy or insolvency. If a change of control repurchase event occurs, Valvoline may be required to offer to purchase the Senior Notes from the holders thereof. The Senior Notes are not otherwise required to be repaid prior to maturity, although they may be redeemed at the option of Valvoline at any time prior to their maturity in the manner specified in the indentures governing the notes. The notes are guaranteed by each of Valvoline s subsidiaries that guarantee obligations under the existing senior secured credit facility described below. In December 2017, Valvoline completed registered exchange offers for the Senior Notes. Senior Credit Agreement The 2016 Senior Credit Agreement provides for an aggregate principal amount of $1,325 million in senior secured credit facilities ( 2016 Credit Facilities ), composed of (i) a five -year $875 million term loan facility ( Term Loans ), and (ii) a five -year $450 million revolving credit facility (including a $100 million letter of credit sublimit) ( Revolver ). At March 31, 2018 and September 30, 2017, the Term Loans had outstanding principal balances of $278 million and $285 million, respectively. At March 31, 2018 and September 30, 2017, there were no amounts outstanding under the Revolver. During the three and six months ended March 31, 2018, Valvoline borrowed and repaid $7 million on the Revolver. As of March 31, 2018, the total borrowing capacity remaining under the Revolver was $439 million due to a reduction of $11 million for letters of credit outstanding. 13

14 The outstanding principal balance of the Term Loans is required to be repaid in quarterly installments of approximately $4 million for fiscal 2018, $8 million for fiscal 2019 and 2020, and $15 million for fiscal 2021 with the balance due at maturity. At Valvoline s option, amounts outstanding under the 2016 Senior Credit Agreement bear interest at either LIBOR or an alternate base rate, in each case plus the applicable interest rate margin. The interest rate fluctuates between LIBOR plus 1.500% per annum and LIBOR plus 2.500% per annum (or between the alternate base rate plus 0.500% per annum and the alternate base rate plus 1.500% annum), based upon Valvoline s corporate credit ratings or the consolidated first lien net leverage ratio (as defined in the 2016 Senior Credit Agreement). The 2016 Credit Facilities are guaranteed by Valvoline s existing and future subsidiaries (other than certain immaterial subsidiaries, joint ventures, special purpose financing subsidiaries, regulated subsidiaries, foreign subsidiaries and certain other subsidiaries), and are secured by a first-priority security interest in substantially all the personal property assets and certain real property assets of Valvoline and the guarantors, including all or a portion of the equity interests of certain of Valvoline s domestic subsidiaries and first-tier foreign subsidiaries. The 2016 Credit Facilities may be prepaid at any time without premium. The 2016 Senior Credit Agreement contains usual and customary representations and warranties and usual and customary affirmative and negative covenants, including limitations on liens, additional indebtedness, investments, restricted payments, asset sales, mergers, affiliate transactions and other customary limitations, as well as financial covenants (including maintenance of a maximum consolidated net leverage ratio and a minimum consolidated interest coverage ratio). As of the end of any fiscal quarter, the maximum consolidated net leverage ratio and minimum consolidated interest coverage ratio permitted under the 2016 Senior Credit Agreement are 4.5 and 3.0, respectively. As of March 31, 2018, Valvoline was in compliance with all covenants under the 2016 Senior Credit Agreement. Trade Receivables Facility On November 29, 2016, Valvoline entered into a $125 million, one -year revolving trade receivables securitization facility ( Trade Receivables Facility ) with certain financial institutions. On November 20, 2017, the Company amended the Trade Receivables Facility to extend the maturity date to November 19, 2020 and increase the maximum funding under the facility to $175 million based on the availability of eligible receivables and other customary factors and conditions. Under the Trade Receivables Facility, Valvoline sells and/or transfers a majority of its U.S. trade receivables to a wholly-owned, bankruptcy-remote subsidiary as they are originated, and advances by the lenders to that subsidiary (in the form of cash or letters of credit) are secured by those trade receivables. The assets of this financing subsidiary are restricted as collateral for the payment of its obligations under the Trade Receivables Facility, and its assets and credit are not available to satisfy the debts and obligations owed to the creditors of the Company. The Company includes the assets, liabilities and results of operations of this financing subsidiary in its condensed consolidated financial statements. During the first fiscal quarter of 2017, Valvoline borrowed $75 million under the Trade Receivables Facility and used the net proceeds to repay an equal amount of the Term Loans. During the six months ended March 31, 2018, Valvoline made payments of $1 million and borrowed $89 million under the Trade Receivables Facility, using the proceeds to supplement the Company's daily cash needs. The Company accounts for the Trade Receivables Facility as secured borrowings. Based upon the maturity dates in place in each respective period, as of March 31, 2018, the $163 million balance outstanding was classified as Long-termdebtand the $75 million balance outstanding as of September 30, 2017 was classified as Short-termdebtin the Condensed Consolidated Balance Sheets.Based on the availability of eligible receivables, the total borrowing capacity remaining under the Trade Receivables Facility at March 31, 2018 was $12 million. The financing subsidiary owned $281 million and $247 million of outstanding accounts receivable as of March 31, 2018 and September 30, 2017, respectively, and these amounts are included in Accountsreceivable,netin the Company s Condensed Consolidated Balance Sheets. The financing subsidiary pays customary fees to the lenders, and advances by a lender under the Trade Receivables Facility accrue interest for which the weighted average interest rates were 2.6% and 2.4% for the three and six months ended March 31, 2018, respectively, and 1.6% for the three and six months ended March 31, The Trade Receivables Facility contains various customary affirmative and negative covenants and default and termination provisions, which provide for acceleration 14

15 of amounts owed under the Trade Receivables Facility in circumstances including, but not limited to, the failure to pay interest or other amounts when due, defaults on certain other indebtedness, certain insolvency events, and breach of representation. NOTE 8 INCOME TAXES Income tax provisions for interim quarterly periods are based on an estimated annual effective income tax rate calculated separately from the effect of significant, infrequent or unusual items related specifically to interim periods. Income tax expense for the three months ended March 31, 2018 was $ 27 million, an effective tax rate of 28.7%, compared to expense of $38 million, an effective tax rate of 34.9%, for the three months ended March 31, The decrease in income tax expense and the effective tax rate was primarily driven by the reduction in the corporate federal income tax rate resulting from the enactment of U.S. tax reform legislation in December Income tax expense for the six months ended March 31, 2018 was $ 121 million, an effective tax rate of 68.0% compared to expense of $76 million, an effective tax rate of 34.7%, for the six months ended March 31, The increase in income tax expense and the effective tax rate was principally driven by the enactment of U.S. tax reform legislation, which resulted in a net increase in income tax expense of approximately $70 million that more than offset benefits related to the reduction in the estimated annual effective tax rate for fiscal U.S. tax reform legislation On December 22, 2017, the President of the United States signed into law tax reform legislation (the Act ), which generally became effective January 1, The Act includes a number of provisions, including lowering the federal corporate income tax rate from a maximum of 35% to 21% and changing or limiting certain tax deductions. While the Company expects this rate reduction will ultimately benefit Valvoline, the Act also includes provisions that are expected to offset some of the benefit of the rate reduction, including the repeal of the deduction for domestic production activities and the expansion of the limitation on the deduction of certain executive compensation. In addition, the Act alters the landscape of taxation of non-u.s. operations and provides immediate deductions for certain new investments, among other provisions. Based on the effective date of the rate reduction in the Act, the Company s federal corporate statutory income tax rate for fiscal 2018 will be a blended rate of 24.5%, declining to 21% for fiscal 2019 and beyond. During the six months ended March 31, 2018, enactment of the Act resulted in the following provisional impacts on income tax expense: The remeasurement of net deferred tax assets at the lower enacted corporate tax rate resulted in a net $67 million increase in income tax expense; Income tax expense increased by $4 million related to the deemed repatriation tax on unremitted non-u.s. earnings and profits and $2 million for withholding taxes due to the Company s change in indefinite reinvestment assertion regarding its undistributed earnings; and The remeasurement of net indemnity liabilities associated with the Tax Matters Agreement increased pre-tax expense by $7 million and generated a $3 million tax benefit primarily related to the higher expected utilization of tax attributes payable to Ashland. The impacts of the Act recorded during the six months ended March 31, 2018 are provisional, and the Company will continue to assess the impact of the Act and will record adjustments through the income tax provision in the relevant period as amounts are known and reasonably estimable. Accordingly, the impact of the Act may differ from the Company s provisional estimates due to and among other factors, information currently not available, changes in interpretations and the issuance of additional guidance, as well as changes in assumptions the Company has currently made, including actions the Company may take in future periods as a result of the Act. There is currently a lack of clarity regarding most state tax implications as a result of the Act, though Valvoline is incorporated in Kentucky, which enacted income tax reform on April 13, 2018 that will be effective for the Company beginning in fiscal The Company is currently in the process of evaluating the impact of Kentucky income tax reform 15

16 on its condensed consolidated financial statements and will record the associated estimated impacts in the period of enactment during the third fiscal quarter of 2018, including the remeasurement of net deferred tax assets at the lower tax rate and the related Tax Matters Agreement indemnity implications, which are not expected to be material to net income. Deferred tax remeasurement The Company s net deferred income taxes represent benefits that will be used to reduce corporate taxes expected to be paid as well as differences between the tax bases and carrying amounts of assets and liabilities that will result in taxable or deductible amounts in future years. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. As changes in tax laws or rates occur, deferred tax assets and liabilities are adjusted in the period changes are enacted through income tax expense. The Company s net deferred tax assets of $281 million were determined at September 30, 2017 based on the then-current enacted income tax rates prior to the passage of the Act. As a result of the reduction in the federal corporate income tax rate from 35% to 21% under the Act, the Company revalued its net deferred tax assets, which resulted in a reduction in the value of net deferred tax assets of approximately $67 million that was recorded as additional income tax expense in the Company s Condensed Consolidated Statements of Comprehensive Income for the six months ended March 31, Deemed repatriation The Act implements a new territorial tax system that imposes a one-time transition tax, or deemed repatriation, on unremitted earnings of certain non-u.s. subsidiaries that is based in part on the amount of these earnings held in cash and other specified assets. The mandatory deemed repatriation resulted in a $22 million gross liability, but allows for the realization of $18 million of previously unrecognized foreign tax credits related to taxes previously paid in relevant local jurisdictions. The net result was $4 million of income tax expense which was recognized during the six months ended March 31, The Company has historically intended to indefinitely reinvest undistributed earnings of its non-u.s. subsidiaries. As undistributed earnings of the Company s non-u.s. subsidiaries were subject to the one-time deemed repatriation tax, the Company reevaluated its intentions to indefinitely reinvest its non-u.s. undistributed earnings. As a result, the Company no longer intends to indefinitely reinvest non-u.s. undistributed earnings and accordingly, recorded $2 million for estimated incremental withholding taxes during the six months ended March 31, The Company is presently not aware of any significant restrictions on the ability to transfer these funds, and additional taxes and other costs that may arise between the deemed and actual distribution dates are not estimated to be material. Tax Matters Agreement Total liabilities related to obligations owed to Ashland under the Tax Matters Agreement were $69 million and $62 million at March 31, 2018 and September 30, 2017, respectively. At March 31, 2018 and September 30, 2017, $3 million and $1 million was recorded in Accruedexpensesandotherliabilities,respectively, and $66 million and $61 million was recorded in Othernoncurrentliabilitiesin the Condensed Consolidated Balance Sheets as of March 31, 2018 and September 30, 2017, respectively. Under the Tax Matters Agreement, Valvoline has net indemnification obligations for a number of tax matters, including certain taxes that arise upon audit or examination related to the periods prior to Distribution and Valvoline s utilization of legacy tax attributes contributed as part of the separation from Ashland. During the six months ended March 31, 2018, Valvoline recognized $8 million of expense in Legacyandseparation-relatedexpenses,netfor the estimated increase in net amounts due. The estimated increase in net amounts due was principally a result of the reduction in the federal tax rate primarily related to the reduced federal benefit of state tax deductions, which drove increases in estimated taxes payable upon audit or examination as well as the expected utilization of tax attributes, which also resulted in an income tax benefit of $3 million during the period. 16

17 Uncertainties in income taxes The Company records reserves related to its uncertain tax positions when it is more likely than not that the tax position may not be sustained on examination by the taxing authorities. As of March 31, 2018, the Condensed Consolidated Balance Sheet includes a $10 million liability for uncertain income tax positions, and during the three months ended March 31, 2018, there were no significant changes in Valvoline s uncertain tax positions or related reserves. As tax examinations are completed or settled, statutes of limitations expire, or other new information becomes available, the Company will adjust its liabilities for uncertain tax positions in the respective period through payment or through the income tax provision. The Company has provided adequate reserves for its income tax uncertainties in all open tax years based on the recognition and measurement considerations in the relevant accounting principles and any adjustments are not expected to have a material effect on its condensed consolidated financial statements at this time; however, it is reasonably possible that there could be changes to the Company s reserves related to its uncertain tax positions due to activities of the taxing authorities, resolution of examination issues, or reassessment of existing uncertain tax positions. Although the timing and nature of the resolution and/or closure of examinations cannot be predicted with certainty, management estimates that it is reasonably possible that reserves related to uncertain tax positions may decrease by as much as $3 million from the resolution of tax examinations in U.S. jurisdictions during the next twelve months. NOTE 9 EMPLOYEE BENEFIT PLANS The total pension and other postretirement benefit income was $9 million and $19 million during the three and six months ended March 31, 2018, respectively, and $17 million and $42 million during the three and six months ended March 31, 2017, respectively. Contributions to the U.S. non-qualified and non-u.s. pension plans during the six months ended March 31, 2018 were $9 million. For the remainder of fiscal 2018, Valvoline expects to contribute approximately $9 million to these plans, for a total of $18 million in fiscal Components of net periodic benefit income Due to the freeze of U.S. pension benefits effective September 30, 2016, the only service costs are related to certain international pension benefits, and therefore, these costs are reported in the respective reportable segment and caption of the Condensed Consolidated Statements of Comprehensive Income as the other employee compensation costs from services rendered. All other components of net periodic benefit income are recognized below operating income within Net pensionandotherpostretirementplannon-serviceincomeandremeasurementadjustmentsin the Condensed Consolidated Statements of Comprehensive Income. Effective January 1, 2017, Valvoline discontinued certain other postretirement health and life insurance benefits. The effect of these plan amendments resulted in a remeasurement gain of $8 million during the six months ended March 31, 2017 as shown in the table below. The following table summarizes the components of pension and other postretirement benefit income for the three and six months ended March 31: 17

18 Pension benefits Other postretirement benefits (In millions) Three months ended March 31 Service cost $ 1 $ $ $ Interest cost Expected return on plan assets (26) (36) Amortization of prior service credit (3) (3) Net periodic benefit income $ (7) $ (14) $ (2) $ (3) Six months ended March 31 Service cost $ 1 $ 1 $ $ Interest cost Expected return on plan assets (52) (72) Amortization of prior service credit (6) (6) Actuarial gain (8) Net periodic benefit income $ (14) $ (28) $ (5) $ (14) Multiemployer pension plan partial withdrawal Valvoline participates in two multiemployer pension plans that provide pension benefits to certain union-represented employees under the terms of collective bargaining agreements. Valvoline assumed responsibility for contributions to these plans in connection with the separation from Ashland. Contributions to these plans were not material for the three and six months ended March 31, 2018 and In April 2018, Valvoline received a demand for payment of a partial withdrawal liability assessment of approximately $30 million related to the sale of a business by Ashland in fiscal 2011 and the associated reduction in the number of employees covered by one of the multiemployer pension plans and the related decline in contributions. The Company plans to vigorously contest the assessment as well as the calculation method utilized in determining the assessment and will submit a formal arbitration request, if necessary. The Company's current best estimate of cost associated with this assessment is not material to the condensed consolidated financial statements as of and for the periods ended March 31, NOTE 10 COMMITMENTS AND CONTINGENCIES From time to time, Valvoline is party to lawsuits, claims and other legal proceedings that arise in the ordinary course of business. The Company establishes liabilities for the outcome of such matters where losses are determined to be probable and reasonably estimable. Where appropriate, the Company has recorded liabilities with respect to these matters, which were immaterial for the periods presented as reflected in the condensed consolidated financial statements herein. There are certain claims and legal proceedings pending where loss is not determined to be probable or reasonably estimable, and therefore, accruals have not been made. In addition, Valvoline discloses matters for which management believes a material loss is at least reasonably possible. In all instances, management has assessed each matter based on current information available and made a judgment concerning its potential outcome, giving due consideration to the amount and nature of the claim and the probability of success. As disclosed herein, the Company believes it has established adequate accruals for liabilities that are probable and reasonably estimable. Although the ultimate resolution of these matters cannot be predicted with certainty and there can be no assurances that the actual amounts required to satisfy alleged liabilities from these matters will not exceed the amounts reflected in the condensed consolidated financial statements, based on information available at this time, it is the opinion of management that 18